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Trading Inefficiencies in California's Electricity Markets

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  • Severin Borenstein
  • James Bushnell
  • Christopher R. Knittel
  • Catherine Wolfram

Abstract

We study price convergence between the two major markets for wholesale electricity in California from their deregulation in April 1998 through November 2000, nearly the end of trading in one market. We would expect profit-maximizing traders to have eliminated persistent price differences between the markets. Institutional impediments and traders' incomplete understanding of the markets, however, could have delayed or prevented price convergence. We find that the two benchmark electricity prices in California -- the Power Exchange's day-ahead price and the Independent System Operator's real-time price -- differed substantially after the markets opened but then appeared to be converging by the beginning of 2000. Starting in May 2000, however, price levels and price differences increased dramatically. We consider several explanations for the significant price differences and conclude that rapidly changing market rules and market fundamentals, including one buyer's attempt to exercise a form of monopsony power, made it difficult for traders to take advantage of opportunities that ex post appear to have been profitable.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8620.

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Date of creation: Dec 2001
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Publication status: published as Borenstein, Severin, James Bushnell, Chris Knittel, and Catherine Wolfram. “Inefficiencies and Market Power in Financial Arbitrage: A Study of California's Electricity Markets." Journal of Industrial Economics 56, 2 (June 2008).
Handle: RePEc:nbr:nberwo:8620

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Cited by:
  1. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
  2. Dae-Wook Kim & Christopher R. Knittel, 2004. "Biases in Static Oligopoly Models? Evidence from the California Electricity Market," NBER Working Papers 10895, National Bureau of Economic Research, Inc.
  3. Huisman, Ronald & Huurman, Christian & Mahieu, Ronald, 2007. "Hourly electricity prices in day-ahead markets," Energy Economics, Elsevier, vol. 29(2), pages 240-248, March.
  4. Lars Kumkar, 2002. "Das kalifornische Strommarktdebakel � Von Liberalisierungsversprechen und Regulierungsversagen," Kiel Working Papers 1097, Kiel Institute for the World Economy.
  5. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge.
  6. Clark II, Woodrow W. & Lund, Henrik, 2008. "Integrated technologies for sustainable stationary and mobile energy infrastructures," Utilities Policy, Elsevier, vol. 16(2), pages 130-140, June.
  7. Anette Boom, . "Investments in Electricity Generation Capacity under Different Market Structures with Price Responsive Demand," Papers 016, Departmental Working Papers.
  8. Méritet, Sophie, 2003. "L'émergence de pouvoir de marché dans les marchés électriques : le cas des Etats-Unis," Economics Papers from University Paris Dauphine 123456789/206, Paris Dauphine University.
  9. Boogert, Alexander & Dupont, Dominique, 2005. "On the effectiveness of the anti-gaming policy between the day-ahead and real-time electricity markets in The Netherlands," Energy Economics, Elsevier, vol. 27(5), pages 752-770, September.
  10. Arciniegas, Ismael & Barrett, Chris & Marathe, Achla, 2003. "Assessing the efficiency of US electricity markets," Utilities Policy, Elsevier, vol. 11(2), pages 75-86, June.

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